Gujarat High Court
Commissioner Of Income Tax I vs Shreenath ... on 1 April, 2014
Bench: Akil Kureshi, Sonia Gokani
O/TAXAP/147/2014 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 147 of 2014
with
TAX APPEAL No. 148 of 2014
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COMMISSIONER OF INCOME TAX I....Appellant(s)
Versus
SHREENATH INFRASTRUCTURE....Opponent(s)
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Appearance:
Mr KM PARIKH, ADVOCATE for the Appellant(s) No. 1
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CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI
and
HONOURABLE Ms. JUSTICE SONIA GOKANI
1st April 2014
COMMON ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI)
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal {"Tribunal" for short} dated 14th June 2013, raising following substantial questions for our consideration : {A} "Whether on the facts and in the circumstances of the case, the ITAT was right in law in allowing the deduction u/s. 80IB (10) read with Section 80IB(1) claimed by the assessee without appreciating that the nature of agreement between the assessee and the unit purchasers shows that it was only a "works contract" in so much that Page 1 of 11 O/TAXAP/147/2014 ORDER the agreement was entered into before the construction was completed and not after the flat or unit was constructed and also the assessee has not borne any risk through this agreement ?"
{B} "Whether on the facts and in the circumstances of the case, the ITAT was right in law in allowing the deduction u/s. 80IB (10) read with Section 80IB(1) to the assessee on profit derived from sale of unutilized FSI without appreciating that the said profit is not eligible for deduction u/s. 80IB (10) r.w.s 80IB (1) as it has not been derived by the assessee from the business activity of development and construction of a housing project ?"
Both the expenses pertaining to assessee's claim for deduction under Section 80IB (10) of the Incometax Act, 1961 {"Act" for short} has a slightly different angle. Question {A} pertains to Revenue's stand that since the assessee was not the owner of the land and perhaps even the permission for construction was granted in favour of the erstwhile owner, the assessee must be seen to have acted as a works contractor and deduction under Section 80IB (10) was not available. This aspect of the matter is fully covered by a decision of this Court in case of Commissioner of IncomeTax v. Radhe Developers, reported in [2012] 341 ITR 403, where under similar circumstances, the Court has held and observed as under : Page 2 of 11 O/TAXAP/147/2014 ORDER "38. In the present case, as already held the assessee had undertaken the development of housing project at its own risk and cost. The land owner had accepted only the full price of the land and nothing further. The entire risk of investment and expenditure was that of the assessee. Resultantly, profit and loss also would accrue to the assessee alone. In that view of the matter, the addition of the Explanation to Section 80IB with retrospective effect of 1.4.2001 would have no material bearing in the cases on hand. We may recall that the said Explanation introduced by Finance (No.2)Act, 2009 provided as under: {Explanation For the removal of doubts, it is hereby declared that nothing contained in this subsection shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government)].
39. We may now move on to the question of ownership of the land.
40. Relevant portion of Section 2(47) reads as under: "2(47): "transfer", in relation to a capital asset, includes,
(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882(4 of 1882); or Section 53A of the Transfer of Property Act reads as under: 53A. Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to Page 3 of 11 O/TAXAP/147/2014 ORDER constitute the transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract, then notwithstanding that where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed therefor by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than a right expressly provided by the terms of the contract:
Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof."
41. In the present case, we find that the assessee had, in part performance of the agreement to sell the land in question, was given possession thereof and had also carried out the construction work for development of the housing project. Combined reading of Section 2(47)(v) and Section 53A of the Transfer of Property Act would lead to a situation where the land would be for the purpose of Income Tax Act deemed to Page 4 of 11 O/TAXAP/147/2014 ORDER have been transferred to the assessee. In that view of the matter, for the purpose of income derived from such property,the assessee would be the owner of the land for the purpose of the said Act. It is true that the title in the land had not yet passed on to the assessee. It is equally true that such title would pass only upon execution of a duly registered sale deed. However, we are, for the limited purpose of these proceedings, not concerned with the question of passing of the title of the property, but are only examining whether for the purpose of benefit under Section 80IB (10) of the Act, the assessee could be considered as the owner of the land in question. As held by the Apex Court in the case of Mysore Minerals Ltd. vs. Commissioner of Income Tax (supra), and in the case of Commissioner of IncomeTax vs. Podar Cement Pvt. Ltd. and others (supra), the ownership has been understood differently in different context. For the limited purpose of deduction under Section 80IB(10) of the Act, the assessee had satisfied the condition of ownership also; even if it was necessary."
Second Question pertains to the Revenue's stand that in the process of developing the housing project, the assessee did not realize the full FSI available for development. The assessee thus sold part of the unutilized FSI and the profit derived from such sale cannot be said to have been and would not arise out of the assessee's activity of development and construction of housing project. To such extent, assessee's claim for deduction under Section 80IB (10) of the Act must be restricted. In this respect, heavy reliance was placed by the Page 5 of 11 O/TAXAP/147/2014 ORDER learned counsel for the Revenue on the judgment dated 5/11 th March 2014 passed by this Court in case of Commissioner of IncomeTax v. Moon Star Developers. In such case, the Court did examine the Revenue's stand with respect to various assesses selling unutilized FSI in the process of development and construction of housing project. Facts in that case were that various assesses had claimed full deduction under Section 80IB (10) of the Act on the sole consideration of the residential units developed and constructed by the assesses fulfilling other conditions under Section 80IB (10) of the Act. It was, however, noticed that in all such cases, there was heavy under utilization of FSI. The utilization in various cases ranged from 11% to 65% and in majority of cases, the construction involved only about oneforth or onethird of the permissible FSI. In this context, the Court upheld the view of the Revenue that the profit relatable to such sale of unutilized FSI would not be eligible for deduction under Section 80IB (10) of the Act. It was in this background of such unutilized FSI, the Court was persuaded to adopt such course. It was held and observed as under : "28. In this context, we may examine, whether the decision of the Assessing Officer to treat the income of the assessees from sale of FSI separate and excludable from the purview of section 80IB(10) of the Act? The concept of FSI, is a wellknown one. Local authorities, such as Corporations, Municipalities and Panchayats, frame regulations for regulating activities of Page 6 of 11 O/TAXAP/147/2014 ORDER development of lands within their local areas. Such regulations are popularly referred to General Development Control Regulations (GDCR). In addition to providing different zones controlling development activities in different areas for regulated and orderly development of urban areas, these regulations also provide for various other details such as maximum height upto which the construction can be carried out, maximum area on the ground floor or on other floors which can be covered under construction, margin to be left on sides, parking facilities to be provided depending on the nature of building and most importantly, the maximum construction that can be carried out on a given piece of land. The last element, namely, the ratio of the land area versus the maximum construction permissible on such land, is referred to as floor space index (FSI for short). It is this FSI which will decide the maximum area of construction that can be carried out on any given piece of land. It is, therefore, not difficult to appreciate that besides several other factors of situational and other advantages and disadvantages, FSI permissible for the land in question would be an important factor in the context of development of the land. Given all other factors same, higher the FSI, the greater the value of the land.
29. It is in this context, we have to appreciate the under utilization of the FSI by the assessees in different housing projects under consideration. From the figures recorded in the earlier portion of the judgment, we can gather that such utilization of the FSI by the assessees ranges from the minimum of 11.14% of the full FSI available to a maximum of 65.81%. In majority of the cases, the assessees have covered barely about Page 7 of 11 O/TAXAP/147/2014 ORDER onefourth or one0third of the permissible FSI.
30. For any commercial activity of construction, be it residential or commercial complex maximum utilization of FSI is of great importance to the developer. Ordinarily, therefore, it would be imprudent for a developer to underutilize available FSI. Sale price of constructed properties is decided on the built up area. It can thus be seen that given the rate of constructed area remaining same, nonutilization of available FSI would reduce the profit margin of the developer. When a developer therefore utilizes only say 25% of FSI and sells the unit leaving 75% FSI still available for construction, he obviously works out the sale price bearing in mind this special feature. Let us compare two instances. In the same area two residential schemes are developed. Both have residential units of 1500 sq. feet. In one scheme 100% FSI is used in another 25% FSI is used and 75% is passed on to the buyer of the unit. Price of the unit in the later scheme would for apparent reason be considerably higher than the former because the buyer there gets not only a residential unit of 1500 sq. feet, he also gets the right to build further construction of 4500 sq. feet. Whether this includes open land or not is not important. In terms of construction business, it is equivalent to sale of land. Thus, therefore, when a developer constructs residential unit occupying a fourth or half of usable FSI and sells it, his profits from the activity of development and construction of residential units and from sale of unused FSI are distinct and separate and rightly segregated by the Assessing Officer.
31. It is true that section 80IB(10) of the Act does not provide that for deduction, the undertaking must utilize 100% of the Page 8 of 11 O/TAXAP/147/2014 ORDER FSI available. The question however is, can an undertaking utilize only a small portion of the available area for construction, sell the property leaving ample scope for the purchaser to carry on further construction on his own and claim full deduction under section 80IB(10) of the Act on the profit earned on sale of the property? If this concept is accepted, in a given case, an assessee may put up construction of only 100 sq. ft. on the entire area of one acre of plot and sell the same to a single purchaser and claim full deduction on the profit arising out of such sale under section 80IB(10) of the Act. Surely, this cannot be stated to be development of a housing project qualifying for deduction under section 80IB(10) of the Act. This is not to suggest that for claiming deduction under section 80IB (10) of the Act, invariably in all cases, the assessee must utilize the full FSI and any shortage in such utilization would invite wrath of the claim under section 80IB(10), being rejected. The question is where does one draw the line. In our opinion, the issue has to be seen from case to case basis. Marginal underutilization of FSI certainly cannot be a ground for rejecting the claim under section 80IB(10) of the Act. Even if there has been considerable underutilization, if the assessee can point out any special grounds why the FSI could not be fully utilized, such as, height restriction because of special zone, passing of high tension electric wires overhead, or any such similar grounds to justify under utilization, the case may stand on a different footing. However, in cases where the utilization of FSI is way short of the permissible area of construction, looking to the scheme of section 80IB(10) of the Page 9 of 11 O/TAXAP/147/2014 ORDER Act and the purpose of granting deduction on the income from development of housing projects envisaged thereunder, bifurcation of such profits arising out of such activity and that arising out of the net sell of FSI must be resorted to. In the present case, none of the assessees have made any special ground for non utilization of the FSI.
32. The contention of the counsel for the assessee that as long as there has been 100% utilization of the maximum permissible area on the ground floor, deduction under section 80IB(10) of the Act cannot be declined, cannot be accepted. As noted earlier, in case of M/s. Moon Star Developers and many other assesses, such full utilization of the ground floor area available for construction resulted into barely 20% to 25% of the FSI being used, remaining more than 75% being left unused. 33. What is available for deduction under section 80IB(10) of the Act is the profit of an undertaking derived from developing and building a housing project. Mere sale of open land or unused FSI as part of the housing project where utilization of the FSI is way short of permissible limits cannot be said to have been derived from such housing project. Terms "derived from", "arising out of" and "attributable to" are often times used in the context of income tax in different connotation. In the case of Sterling Foods (supra), the assessee was engaged in processing prawns and other sea food which it exported. In the process, the assessee earned import entitlements to use itself or sell the same to others. During the year under consideration, the assessee included such sale proceeds for claiming relief under section 80HH of the Act, in case of any Page 10 of 11 O/TAXAP/147/2014 ORDER profit or gain derived from an industrial undertaking in backward areas. In this context, the Apex Court held that the import entitlements cannot be said to be derived from the industrial undertaking of the assessee. For the application of the words "derived from", there must be a direct nexus between the profits and gains and the industrial undertaking and in the case on hand, the nexus was not direct but only incidental."
In the present case, the facts are somewhat different. The assessee, in the process of developing two housing projects, had utilized 9595.64 sq.m of build able area against the maximum permissible area of 13004 sq.m and in other cases, put up construction of 5997.28 sq.m against maximum permissible construction on 8127.75 sq.m. Under utilization, if at all was in the marginal range of 25% to 30%. As held by this Court in case of Moon Star Developers [Supra] every case of even marginal under utilization of FSI would not be hit by disallowance of deduction under Section 80IB of the Act.
In the result, Tax Appeals are dismissed.
{Akil Kureshi, J.} {Ms. Sonia Gokani, J.} Prakash* Page 11 of 11